each individual has a budget line which they follow for expenditures. If the income of the individual increases what is the effect of the budget line?
Your question is from Indifference Curve analysis.
Budget Line always shifts upward or right ward due to increase in income and shifts downward or leftward due to decrease in income.
Each individual has a budget line which they follow for expenditures. if the income of the individual increases what is the effect on the budget line?
When the income of an individual increases, the effect on the budget line depends on whether the individual is a normal spender or a luxury spender.
1. Normal Spender: For individuals who are considered normal spenders, an increase in income will result in a parallel shift in the budget line. This means that the slope of the budget line remains the same, but it shifts outward in a parallel manner. The individual can now afford to spend more on all goods and services without changing their relative prices.
2. Luxury Spender: On the other hand, if the individual is a luxury spender, an increase in income will result in an outward rotation or pivot of the budget line. This means that the slope of the budget line changes, becoming steeper. As a result, the individual will allocate a larger proportion of their budget to luxury goods and services, while reducing spending on necessities.
In both cases, the effect of the budget line is an expansion of the set of affordable consumption options for the individual. They now have more choices and can allocate a larger portion of their income towards desired goods and services.